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EPT 3102
Agricultural Economics
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Introduction to Economics
The word economycomes from a Greek
word for one who manages a
household.
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Introduction to Economics
EconomicsEconomics examines how people use theirscarce resourcesscarce resources to satisfy their unlimitedunlimitedwantswants.
A social sciencesocial science because it deals with peoplein their daily activities where choices are
required.
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Scarcity, Choice and OpportunityScarcity, Choice and Opportunity
CostCost
Scarcity (scarce resources)Scarcity (scarce resources)
Not freely available- when its price exceeds zeroA good/service is scare when we must give up
(sacrifice) some amount of one thing to get some
of another good/service.As we make our choicechoice in the face of scarcity,costs are generated which is known asopportunity costs(the value of alternativeopportunities forgone or scarified).
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Resources
Inputs -factors of productionUsed to produce goods and servicesGoods and services are scarce because resources
are scarce
Four general categories:-LaborCapitalLandEntrepreneurial ability
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Labor and Capital
Labor: broad category of human effortPhysical and mental
Time
Scarcity of time scarcity of labor
Capital: Human creations used to produce goodsand services
Physical capital: factories, machines, tools, buildings,airports, highways and other manufactured itemsemployed to produce goods and services.
Human capital: consists of the knowledge and skill
people acquire to enhance their labor productivity.
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Land and Entrepreneurial Ability
Land
Land and other natural resources
Gifts of nature including bodies of water,trees, oil reserves, etc.
Entrepreneurial ability
Special kind of human skillTalent required to dream up a new product
or find a better way to produce an existing
one.
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Goods and Services
Goods Tangible items
Services Intangible items
Good or service is scarce if the amount peopledesire exceeds the amount that is available at azero price we must continually choose amongthemChoices in a world of scarcity implies we must pass up some
goods and services
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Free Goods
Goods that are available at azero price
For example, while air and seawater may
appear to be free, clean air and seawater
have become scarce.
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Economic Decision Makers
(Markets)
3. Product markets
Markets in which goods and services are boughtand sold
4. Resource markets
Markets in which the resources are exchanged
Labor, or job, market is the most important ofthe resource markets
Buyers and sellers carry out exchanges
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Lecture week 1
Exhibit 1: Circular-Flow Model
Households supply resourcesin the resource market and
demand goods and services in
the product marketFirms supply goods and
services in the product market
and demand resources in the
resource marketMoney flows in resource
markets determine wages,
interest, rents and profits which
flow as income to householdsProduct markets determine
the prices for goods and
services which flow as revenue
to firms
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Agricultural Economics
Definition:
An applied social scienceapplied social sciencedealing with how humans choose to use
technical knowledge and scare productive resourcestechnical knowledge and scare productive resourcessuch as land,
labor, capital, and management to produce food and fiberfood and fiberand to
distributedistribute it forconsumptionconsumption to various members of society overtime. Cramer and Jensen (1994).
An applied social science that deals with how producers,
consumers, and societies use scare resources in the production,
processing, marketing, and consumption offood and fiber
products. Penson et al. (2002).
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Agribusiness
Definition:
The sum total ofall operationsall operations involved in the manufacturemanufacture and
distributiondistribution offarm suppliesfarm supplies; production operationsproduction operations on the
farm; and the storage, processing, and distributionstorage, processing, and distribution offarmfarm
commoditiescommodities and items made from them. Davis and Goldberg(1957).
Farming engaged in as a large-scale business operation embracing
the production, processing, and distribution of agricultural productsand the manufacture of farm machinery, equipment, and supplies.
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Microeconomics and Macroeconomics
MicroeconomicsMicroeconomicsExamines the factors that influence individual
economic choices.
Studies the individual pieces of the economicpuzzle.
MacroeconomicsMacroeconomics
Studies the performance of the economy as awhole.Focuses on the big picture.
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Scientific Method
Identify the question and define the relevantvariablesVariable is a measure that can take on different
values
Specify AssumptionsCeteris paribusCeteris paribus --Other-things-constant assumption
(Holding some variables constant, while letting specific variableschange)
Behavioral assumption refer to how people behave rational self-interest consumer maximizessatisfaction and firm maximizes profits
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Normative versus Positive
Positive EconomicPositive EconomicAssertion about economic realitySupported or rejected by reference to the facts
Value judgmentsDeals with what is, what can be
Normative EconomicNormative EconomicOpinions should try,should doCannot be shown to be true or false by reference to the
factsSubjective
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Topic Highlights
It is because ofscarcity that we must economize in choosingbetween desire alternatives.
Sacrificing one thing for another gives rise to the true costs ofmaking choices.
Agricultural economics is a social science applied toagricultural problems.
Positive economics results from a scientific analysis of factsrelevant to a situation; normative economics involves our
personal values.
Agribusiness includes the functioning of the entirefood andfiber system from the input industry to the farm and theultimate consumer.
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Production Possibilities FrontierProduction Possibilities Frontier
(PPF)(PPF)
Focus is on how much an economy can produce with
the resources available What are the economysproduction capabilities?
Simplifying assumptions:-Two broad classes of products consumer goods and
capital goods
Production during agiven time period one year
Resources available arefixedin both quantity and quality
during the time period
The available technology does not change
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Production Possibilities Frontier (PPF)Production Possibilities Frontier (PPF)
Identifies the various possible combinations of the
two types of goods that can be produced when all
available resources are employed fully and
efficiently.
No change increases the production of one good
without decreasing the production of the other
good.Involves getting the maximum possible output
from available resources.
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Lecture week 1
Figure 1: PPFFigure 1: PPF
Combination Consumergoods
CapitalGoods
ABCDE
F
5048433420
0
010203040
50
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Production Possibilities Frontier (PPF)Production Possibilities Frontier (PPF)
Points
Aand
F= amount of
consumer goods and capital goods that
can be produced per year if all
resources are used efficientlyPoints betweenA and F= other
possible combinations of the two goods
produced when all resources are
efficiently employedPoints inside the curve,I, =
combinations that do not employ
resources efficiently or fully Point Cyields more consumer goods
and no fewer capital goods thanI,
while point Eyields more capital goods
and no fewer consumer goods thanI,
and all points between Cand Eyield
more of both goodsPoints outside the PPF, such asU, =
unattainable combinations PPF
serves as the frontier between
unattainable and attainablecombinations.
0
10
20
34
43
50
0 10 20 30 40 50
Capital Goods
(millions of units per year)
ConsumerGoods
(millions
ofunitsp
eryear)
48
A
C
D
E
F
B
U
I
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Movements along the PPFMovements along the PPF
Law of Increasing CostsDictates the bowed-out shape of the PPFWhen the economy uses all resources efficiently, each
additional increment of one good requires the economy tosacrifice successively larger and larger increments of theother goodOccurs because resources drawn away from consumer goods
are those that are increasingly better suited to producingconsumer goodsFirst 10 million units of capital goods have an opportunity cost of
only 2 million units of consumer goods whileFinal 10 million (points E to F) have an opportunity cost of 20
million units of consumer goods
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Factors that can shift the PPFFactors that can shift the PPF
1. Changes in Resource Availability Increases / Improvements in Quality rightward shift Decreases / Reductions in Quality leftward shift
2. Increases in the Capital Stock Increases rightward shift Decreases leftward shift
3. Technological Change Employs available resources more efficiently
rightward shift
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Lecture week 1
26
All of the following exampleswould lead to a rightward shift
in the PPF from A to A:1. Increase in the size or
health of the labor force
2. Improvement in the skills
of the labor force3. Increases in the amount
of capital
Decreases in any of the
above factors would shift the
PPF from A' to A shift to
the leftThe parallel shift implies the
change that occurred affected
the production of both goods
equally
Exhibit 2a: Shifts in the PPFExhibit 2a: Shifts in the PPF
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Lecture week 1
27
A leftward shift from A to
A"could be caused by any
of the following examples:1. Decrease in the size
or health of the labor
force
2. Decline in the skills ofthe labor force
3. Decreases in the
amount of capital
The parallel shift implies
the change that occurred
affected the production ofboth goods equally
Exhibit 2b: Shifts in the PPFExhibit 2b: Shifts in the PPF
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Lecture week 1
Exhibit 2c: Shifts in the PPF
28
Increase in resources or
technological change that
benefits consumer goods
would rotate the PPF
outward from the horizontal
axis, fromA
toA'
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Lecture week 1
Exhibit 2d: Shifts in the PPF
29
Increase in resources or
technological advance that
benefits capital goods would
rotate the PPF outward from
the vertical axis, F to F'
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Lessons of PPF
Efficiency PPF represents thecombinations of output that are possible,given the economys resources andtechnology
Scarcity Given the stock of resources andtechnology, the economy can produce only somuch
Economic Growth
rightward shift orrotation of PPFChoice
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Three QuestionsThree Questions
How an economy selects the most preferred combination
will depend on the decision-making rules employed.
Regardless of how decisions are made, each economy must
answer three fundamental questions
WhatWhatgoods and services will be produced?
HowHowwill they will be produced?Forwhomwhom will they be produced?